The recent earnings report released by Tesla shows their intention to raise $1.5 billion in junk bonds, and also to drop the price of the Model X
Not long after these revelations, the company announced that they would be opening a factory in China.
A little over a week ago, Tesla released their earnings report, which shed light on the current fundamental interests to the company. Demand for the Model 3 and Model X have surprised analysts. Despite the future obviously never being predictable, all signs appear to be pointing to a bright future for the electric vehicle/energy company.
Tesla offering $1.5 billion in junk bonds
Tesla’s new Model 3 Sedan has proven to be highly popular, customer reservations for the electric vehicle have skyrocketed to around 455,000 pre orders. Consequently, Elon Musk proposes offering notoriously high-risk junk bonds to raise the necessary $1.5 billion in revenue to meet the demand.
Companies in financial trouble generally offer junk bonds, and it was only last March that Tesla raised $1.4 billion in a convertible debt offering. Musk appears to be willing to risk offering junk bonds due to his faith in the popularity of his products.
Many are surprised that Musk chose the route of junk bonds over raising equity. However, Tesla wish to avoid diluting their existing stockholders. They estimate that the debt market could end up swelling that in the long run.
High profitability enables Tesla to drop Model X price
People wishing to get their hands on an electric vehicle may be closer to doing so. Tesla has dropped the price of their Model X by $3,000. Originally selling at $82,500, you can now get your hands on the car for $79,000. So why the dramatic price reduction?
According to Tesla, the production process has revealed many “efficiencies.” Consequently, this resulted in raised profit margins. Subsequently, the company believes that sales of the Model X will grow.
A spokesman for Tesla explained to Electrek: “When we launched the Model X 75D, it had a low gross margin. As we’ve achieved efficiencies, we are able to lower the price and pass along more value to our customers.”
Nevertheless, Tesla’s tactics regarding both the Model S and Model X have some investors skeptical. Musk is encouraging aggressive growth targets, and this makes investors nervous, particularly since initial production is generally challenging.
Tesla plans for a factory in China
Confirmed in a recent email to the press, Tesla has also revealed plans to open a production plant in Shanghai. Obviously, this is a big step for Tesla, who up till now has produced all of its vehicles inside the US. Currently, Tesla only has production plants located in Sparks, Nevada, and Fremont in California.
Initially, rumors of a deal between Tesla and the Chinese began to circulate when Musk made an unexpected visit to China in April. The billionaire entrepreneur met with the Chinese Vice Premier, Wang Yang. This rumor came on the tail of China’s Tencent Holdings buying a 5% stake in Tesla.
The Chinese market is one of its largest, and the electric car makers clearly wish to further cash in. By doing so, they also hope to avoid import taxes of 25% of the vehicle prices. Tesla is required to set up a joint venture with, in the least, a single Chinese partner. This is a requirement of Chinese law. According to sources, the factory would likely be constructed in the Ling Lang Development Zone.
Tesla estimates that production will increase with the new factory, to around 500,000 new electric cars per year. Furthermore, this will make their vehicles more easily available throughout Asia and even Europe. The company has also hinted at having interests in having factories in other parts of the globe.
According to a Tesla spokesperson: “Tesla is deeply committed to the Chinese market, and we continue to evaluate potential manufacturing sites around the globe to serve the local markets.”